Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2008-03-06
Number: 08-024/2
Author-Name: Ludger Linnemann
Author-Email: ludger.linnemann@uni-bonn.de
Author-Workplace-Name: University of Bonn
Author-Name: Andreas Schabert
Author-Email: a.schabert@uva.nl
Author-Workplace-Name: University of Dortmund
Title: Optimal Government Spending and Unemployment
Abstract: We study optimal government spending in a business cycle model with frictional unemployment. The Ramsey optimal policy is contrasted with a reference policy which would be first best in a frictionless economy. Results are: the Ramsey policy i) implies a higher steady state ratio of government spending to private consumption than the reference policy; ii) is procyclical under technology shocks and countercyclical under demand shocks (while the public spending ratio to private consumption is always countercyclical); iii) stabilizes employment, in some cases even at the cost of higher consumption volatility; iv) is qualitatively unaltered in a sticky price version with jointly optimal monetary and fiscal policy.
Classification-JEL: E62; E32
Keywords: Optimal fiscal policy; government spending; labor market frictions; unemployment; stabilization policy
File-Url: https://papers.tinbergen.nl/08024.pdf
File-Format: application/pdf
File-Size: 368660 bytes
Handle: RePEc:tin:wpaper:20080024